Home Value: What Does It Truly Mean?

Spend a little time perusing through a real estate market and one of the themes that’s sure to come up is this nebulous concept of value. One home is being listed for $800,000 and another very similar home is listed for $900,000. Behind closed doors the deals are made and the former closest at $870,000 while the latter closes at $865,000. If you’re to pace a bid yourself, or if you’re to observe the bids of others, it’s very common that they won’t come in exactly at what the seller is asking for. Depending on the market conditions bids are just as likely to be over the asking price than to be other.

It leads you think as a patient observer, where are people even getting these numbers? They throw them around seemingly arbitrarily, without seeming to bat an eye at the fact that they’re talking about tens or even hundreds of thousands of dollars. Have we gone completely insane? I don’t know about you, but I can’t just magically make an extra $20,000 cash appear.

Personally, I think it mostly has to do with the fact that none of us have really any clue what we’re doing when judging the value of such a high ticket item – or any item for that matter. Sure, we can tell if one thing is more expensive than another. We can also tell if we like one thing more than another. But what is anything actually worth?

The answer is fairly simple. Any given item is worth what a buyer is willing to pay you for it. End of story. There are no rules in a free market, it’s the Wild, Wild West. To be honest, that’s truly the beauty of it. The dark side however is that so many (almost all) people just take it at face value, as if some higher power set the prices and that’s what we’re going to pay.

This is why it’s so important as you start to pay attention to your money to remove emotion from the equation, to have systems in place for your decision making, and to be ready to negotiate or walk away if someone is charging more than you set out to pay for it.

Fortunately, using similar logic you can get people to pay essentially whatever you want. You just have to tell them a story. Let’s look at the craft beer market as an example. This market has just flooded with new products. Some are no more expensive than Sam Adams, and some are 10x or more for the same quantity of beer. What gives? It all gets you drunk in the same way. How are the few at the top getting top dollar for their beer? Well, first they show you how it is a superior product. Then they rely on scarcity. You can only find it once in a blue moon, so whenever you can get your hands on it, you pay whatever it takes. If you’re at a bar, what’s the difference between a $5 beer, a $6 beer, and a $7 beer? Well, probably not much at the end of the day. However, the $7 beer costs a full 40% more than the $5 beer. That’s a huge difference for something you probably wouldn’t even notice, especially if you truly believe the $7 beer is better quality. And why can’t the same sorcery be applied to higher valued items like houses? Reality check, it is. All the time.

At the end of the day, your home’s value is what you make it out to be as the seller. If you show prospective buyers why your home is worth more than others with specific, visual examples you’ll be more likely to close the deal at a price where you’re happy. With any luck the buyers will be happy too, and you should feel good about that because, after all, it was you who educated them in the first place.

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